Health Savings Accounts: How Will They Respond to Health Care Reform

With two new laws (The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010), the U.S. achieved the most sweeping change in healthcare accessibility since Medicare.

Coming in 2014, anyone who is not covered through Medicaid, Medicare or another government-sponsored program will be required to carry at least minimum health insurance.

This is expected to increase the already rapidly growing market for high-deductible health insurance plans that can be combined with a Health Savings Account (HSA).

Penalties For Inadequate Health Insurance

Minimum coverage will include eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and other forms of coverage accepted by the secretary of Health and Human Services along with the Treasury secretary.

There are a few exceptions to this requirement. Anyone who is incarcerated, not legally present in the U.S. or who qualifies for a religious exemption won't be required to maintain minimum health insurance.

Beyond those exemptions, inadequate insurance could leave you facing a penalty equal to the greater of either a flat amount or a percentage of your income. Under the Reconciliation Act, the flat-amount penalty will be $95, and the income percentage penalty will be one percent of income beginning in 2014.

Fortunately the same act specifies that liens and seizures are will not be authorized to enforce the new law. In addition, people who fail to comply will not be subjected to criminal penalties.

Why Health Savings Accounts Are Already Seeing Higher Demand Health Savings Accounts have been reported to be growing exponentially in the past few years as the cost of health insurance rose even faster. High-deductible health insurance plans are particularly popular because such plans typically offer lower premiums in exchange for the cost-sharing aspect of high deductibles.

This attractive combination of lower-premium plans and savings accounts that earn tax-free interest while allowing tax deductions for health care expenses has sparked record investments. The demand is expected to continue growing as more people search for health care insurance in the coming years.

How Legislation Will Change Health Savings Accounts

While HSA Plans remain top contenders among low-cost premium choices, the recent legislation has had less favorable impacts on such plans. Under the Patient Protection Act, over-the-counter drugs will no longer be reimbursable through an HSA.

The same will be true for similar accounts, including Archer medical savings accounts, health flexible spending accounts and health reimbursement arrangements.

That change does not affect medications prescribed by a doctor or insulin, though. All of these will still meet the definition of "qualified medical expenses." This particular change will be effective for expenses incurred as of 2011.

HSA Distributions Not Used For Qualified Expenses Face Increased Tax

Also starting in 2011, the tax on distributions from an HSA or Archer MSA that are not used for qualified medical expenses will be increased to 20 percent of the disbursed amount.

Before the new legislation, that tax was just 10 percent of the disbursed amount for an HSA and only 15 percent for an Archer MSA.

Increased taxation will make it more important to follow guidelines regarding which purchases will be treated as qualified medical expenses in the future.

Medical Expense Deduction Threshold Will Be Higher

Beginning in 2013, the threshold to claim an itemized deduction for unreimbursed medical expenses is going to increase from 7.5 percent to 10 percent of adjusted gross income.

However, from 2013 through 2016, the increased threshold will not apply if either the taxpayer or the taxpayer's spouse will be 65 before the end of the year.

Health Savings Accounts Continue to Offer Premium Plans

Despite the reduction in qualified expenses and increased penalties, the opportunity for tax deductions and higher account earnings with tax-free interest will keep HSA Plans growing in popularity. Combine those benefits with the lower premiums of qualified high-deductible health insurance plans and HSA Plans may well be the number one choice in coming years.